Modern Money Theory is something that I’ve just come across recently. The main tenant of #MMT is that trade surpluses and deficits don’t matter if inflation is measured accurately and government’s are trusted to increase or decrease the money supply directly through equity based money creation as opposed to debt-based money creation. I encourage anyone is who is as perplexed about the nature of money as I am to check out the following post and to research Modern Money Theory further. I don’t know if it really offers all the solutions, I don’t think any system ever will, but the idea of eliminating deposit insurance and allowing private banks to fail while creating government backed banks that offer 100% reserve digital cash storage (i.e. deposited cash is stored and NOT lent out) is compelling. The idea of governments increasing or decreasing the cash supply directly via depositor accounts is counterintuitive but in the context of a system that aims for stable purchasing power (no inflation or deflation) I understand how it would work. It’s not clear to me, however, where interest rates would come into play…If the time value of money is stable how is the cost of money measured for capital investments? Anyway, check this blog out. It’s a nice change from the usual Austrian/Keynsian dialectic which is like a train without wheels and very soon going nowhere.
http://aquinums-razor.blogspot.com/2010/11/modern-monetary-theory-there-is-another.html
Wyndtunnel 
The central bank would still control interest rates by setting the overnight rate. Same as it does now. The cost of money for capital investments will be set soley by the risk to the bank\investor. The only risk a bank would have is if it’s investment’s all go bust which is why they’ll want to charge more on what it deems riskier investments. That’s why it’ll be important to let banks fail.
For a better understanding of how open market operations would work and what the objectives of open market operations would under such a banking system be please read:
http://aquinums-razor.blogspot.com/2010/11/modern-monetary-theory-inflation-and.html
Here is how the banker’s game works:
1) Get the government to issue some currency (cash — paper or reserves at the central bank — reserves are government issued cash central bank deposits). Government issued cash is around 5% of the currency (money) supply. The government issued currency is put into circulation by the government simply spending it.
2) The rest (95%) of the currency is issued by the private banks. Each customer loan is a new bank deposit (i.e., new currency) and increases the currency (money) supply of the economy. Note that this newly created money (currency) is put into circulation by the borrower spending it. Most currency (about 95% America’s currency supply) has been borrowed into existence and when bank customer pays the loan back that amount of currency is removed from circulation. The banking system cannot go backwards (fewer net loans) as time moves on because fewer net loans means fewer currency in circulation in the economy.
Accmulation of interest charges on outstanding loans means that the currency supply must constantly increase even if it means giving out lower quality loans. Think of it like a plane flying it must fly at some minimum speed or else the plane (the banking system) will crash (i.e., banking system collapse).
3) The bankers make dam sure that the common public does not understand how the monetary system works meaning that the private banks issue 95% of the currency. This is whole another topic how they do this.
4) The system works until real economic capacity of the economy grows and debts can be serviced and interest charges paid. Most of the time the economy oscillates between boom (growth) and bust (recession) because bust is needed to clear debts and start a new lending cycle.
5) Eventually, one of these cycles goes so deep that currency supply (and demand) falls so low that too many debts become un-serviceable. The recession becomes a depression now.
6) The bankers then have to decide how to “reset” the system. One way to reset the system is to let the depression takes its course. But of course this path is very chaotic because people lose jobs and may become violent. Once most debts are cleared lending can start again and the currency supply is replenished. Wars are a good way to get initial money (currency) into an economy after a depression to get demand going again. This is the great depression scenario.
7) Another way to “reset” the system is to get the government to print too much money and spend and destroy the currency and blame it on the government. This justifies issuance of a totally new currency (note that hyperinflation clears debts) and the lending cycle can start again. This is the Weimar scenario.
8) The banking system (as is) is setup to maximize the power and influence of the global bankers and NOT for the maximum general well being of people. By the way this is a global game. This is the only system around no matter what country you are in. The global banking cartel makes sure that no competing systems are allowed to exist (so they might be copied and global bankers will lose power).
For more details on this stuff please read the following articles in order listed below:
http://seekingalpha.com/article/209386-modern-monetary-system-there-is-another-way
http://aquinums-razor.blogspot.com/2010/07/why-is-deflation-and-depression.html
http://seekingalpha.com/article/210346-should-newly-created-money-be-a-private-or-a-public-asset
http://seekingalpha.com/article/192375-cause-of-today-s-economic-crises-too-much-thrift
http://seekingalpha.com/article/160269-a-radical-solution-for-america-s-insolvent-financial-system
http://seekingalpha.com/article/146658-great-banking-confusion-is-there-a-better-way